University College of Southeast Norway School of Business – Master Thesis Study programme: Industrial economics Spring 2017
Knut Philip Thjømøe
Competitive advantage in dynamic markets
A qualitative approach to competitive advantage with a holistic multiple-case design
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University College of Southeast Norway School of Business
Department of Business, Strategy and Political Sciences PO Box 235
NO-3603 Kongsberg, Norway http://www.usn.no
© 2017 <Knut Philip Thjømøe>
This thesis is worth 30 study points
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Preface
This master thesis is the final dissertation in the study programme Business administration with a specialization in Industrial economics at the University College of Southeast Norway.
The topic of this master thesis is competitive advantage in dynamic markets. Several
complementary and competitive theoretical frameworks have been developed which intrigued me to conduct an empirical investigation of the phenomenon. This master thesis has presented many difficult challenges, especially in regards to the methodological choices. However, it has been motivating to use my theoretical knowledge to make practical choices. The decision of writing alone has had both its benefits and drawbacks, and there were times of frustration where a second researcher would be useful. However, looking back at the research process I am confident that the flexibility of being one researcher has increased the quality of the overall dissertation.
Firstly, I would like to thank Boge Gulbrandsen for a very interesting strategy course which resulted in my interest in the phenomenon competitive advantage. Furthermore, I would like to thank the companies that agreed to participate in this study. I would also like to thank the several people who helped me collecting cases and came with helpful suggestion to which industries to target. Lastly, I would like to give a special thanks to my supervisor Eskil Goldeng for great feedback during the entire research process.
Kongsberg, May 15th, 2017
Knut Philip Thjømøe
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Executive summary
The general interest in competitive advantage amongst academics has resulted in an extensive development of theoretical frameworks. Different theories fits in different markets based on the market characteristics. Increased globalisation has resulted in dynamic business
environments and companies find themselves competing in an innovation-based economy.
The resource-based view is one of the most prominent theories of competitive advantage, but is more applicable in static markets. The dynamic capabilities theory is an extension of the resource-based view of the firm and emphasises markets with a high level of dynamism.
The resource-based view assumes that the resources are divided heterogeneously amongst firms in an industry and that these resources are imperfectly mobile. The scarcity of these resources allows firms to benefit from first mover advantages. Resources that are valuable, rare, non-imitable and non-substitutional has the potential to create sustained competitive advantage. In dynamic markets, the theory suggests that the source of competitive advantage lies in the firm’s ability to continuously create, change and modify these resources in order to benefit from opportunities presented in the market. Sustained competitive advantage is
obtained by continuous repositioning to gain a series of temporary advantages. The purpose of this study is to investigate which factors are important in achieving and sustaining competitive advantage in dynamic markets. Therefore, the research question for this master thesis is as follows.
“What are the sources of competitive advantage in a business environment characterized by high dynamism, and how is the competitive advantage sustained in such markets?”
This study uses a qualitative research approach with a holistic multiple-case design. Four companies are participating whereby two are experiencing a competitive advantage and two are experiencing a competitive disadvantage. The data collection was done through structured interviews with two informants from each case. Each case was first analysed separately before I conducted a comparative analysis in order to search for patterns amongst the cases.
The findings of this study support the existing argument that the resource-based view is less applicable in dynamic markets. However, this study also highlights a clear link between the resource based view and the dynamic capabilities theory. Furthermore, this study suggests
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that each company possesses dynamic capabilities but the differences lies in the rapidness of which they are deployed. The companies with a competitive advantage has a more continuous deployment of dynamic capabilities than the companies with a competitive disadvantage. The findings also suggests that dynamic capabilities are necessary to simply survive in a dynamic market. Practitioners should strive to obtain a company culture that manages internal changes well in order to adjust to the market dynamism. This study contributes theoretically by emphasising that time is an important factor when describing the phenomenon competitive advantage in dynamic markets. A competitive advantage cycle was identified which supports the argument of the dynamic capabilities theory that companies can obtain sustained
competitive advantage through a series of temporary advantages.
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Table of contents
Preface... ii
Executive summary ... iii
Table of contents ... v
List of figures ... vii
1.0. Introduction ... 1
1.1. Research question ... 3
1.2. Structure ... 3
1.3. Literature search ... 4
2.0. Theoretical framework ... 5
2.1. Definitions ... 5
2.2. Competitive forces approach ... 8
2.3. The relational view ... 8
2.4. The resource-based view ... 9
2.4.1. Resource scarcity ... 9
2.4.2. First mover advantage ... 10
2.4.3. VRIN-attributes ... 10
2.5. The dynamic capabilities theory ... 12
2.5.1. New sources of competitive advantage ... 13
2.5.2. The influence of market dynamism on competitive advantage ... 15
2.5.3. Sensing, seizing and managing opportunities and threats in a dynamic market 16 2.5.4. Empirical review of the Dynamic Capabilities theory ... 18
3.0. Discussion and conceptual model ... 22
4.0. Methodology... 24
4.1. Philosophical stance ... 24
4.2. Research method ... 26
4.3. Research design ... 27
4.3.1. Case study ... 28
4.4. Selection of cases ... 30
4.4.1. Case requirements ... 30
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4.4.2. Collection of cases ... 31
4.5. Data collection ... 33
4.5.1. Interview ... 33
4.5.2. Sampling informants ... 34
4.5.3. Interview guide ... 34
4.5.4. The interview process ... 36
4.6. Data analysis process ... 36
4.6.1. Transcribing ... 37
4.6.2. Coding ... 37
4.7. Validity and reliability ... 38
5.0. Data analysis and findings ... 43
5.1. Biotech ... 43
5.2. Engineering ... 49
5.3. Mediahouse ... 54
5.4. Software ... 60
5.5. Comparative analysis ... 66
6.0. Discussion ... 70
6.1. Competitive advantage and sustained competitive advantage... 70
6.2. Conceptual model ... 72
7.0. Conclusion and implications ... 74
7.1. Conclusion ... 74
7.2. Theoretical implication ... 75
7.3. Practical implications ... 75
7.4. Limitations ... 76
7.5. Suggestion for further research ... 77
References ... 78
Appendices ... 82
Appendix A: Receipt from NSD ... 82
Appendix B: Interview guide ... 83
Appendix C: Coding list ... 87
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List of figures
Figure 1: Conceptual model ... 23
Figure 2: Processes in qualitative research (Yin, 2013) ... 27
Figure 3: Case designs (Yin, 2009) ... 28
Figure 4: Cases and informants ... 32
Figure 5: Comparative findings ... 67
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1.0. Introduction
In the field of strategy, one of the fundamental questions is how firms obtain and sustain competitive advantage. Several scholars have contributed to the explanation of this question and multiple theories have been developed (Teece, Pisano, & Shuen, 1997). One of the leading strategy academics, Michael Porter (1980), built on the traditional Industrial Organisation framework by Bain (1956) and Mason (1939), and argued that the firm’s performance is affected by the external forces in the industry. The differences in firm performance is a result of how well the firms exploit these forces. Whereas the competitive forces approach by Porter (1980) takes an ‘outside-in’ perspective on explaining competitive advantage (Spanos & Lioukas, 2001). The resource-based view of the firm takes an ‘inside- out’ perspective and looks at the resources that resides within the firm, suggesting that these factors are the determinants for differences in performance. The firms’ ability to obtain a sustained competitive advantage lies in their internal and external resources, as long as the resources possess the VRIN-attributes (Barney, 1991).
However, in an increasingly globalised world where markets are characterized by rapid
changes in the competitive landscape, the resource-based view of the firm does not adequately explain the new sources of competitive advantage (Eisenhardt & Martin, 2000; Teece et al., 1997). Different business environments demands and emphasises a different set of firm attributes. Not only for the firm to sustain or gain a competitive advantage, but to simply survive as a business. For example, static markets and markets with a low level of dynamism does not emphasise the firm’s ability to deal with uncertainty. In dynamic markets, firms must be able to respond to quick changes in order to maintain their position (Teece, 2007).
In his work from 1990, Porter presents a theory on the competitive advantage of nations.
Porter (1990) argues that the source of competitive advantage depends on which of the three competitive development stages the economy currently resides in. In a factor-driven economy, firm performance is determined by low input costs. Firms that utilize low-cost labour and other input factors to produce less advanced products will obtain a competitive advantage. In an investment driven economy, the firm’s competitive advantage lies in the production of more advanced products. Firms’ large investments results in more efficiently production of goods and services. Economies that are currently in the innovation-driven stage face strong competition and uncertainty in the business environments. In such dynamic markets, the dominant source of competitive advantage lies in the firms’ ability to innovate. Innovation is
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not limited to goods and services, but to for example processes and business models as well.
The goal is to offer unique value to the customer, with the use of an unique strategy (Porter, 1990). In most western countries with high income, the firms’ competitive advantage and survival relies on the ability to innovate.
The Dynamic Capabilities framework draws on the resource-based view framework but considers market dynamism when identifying the source of competitive advantage. Whereas the resource-based view considers the nature of rents to be Ricardian, the dynamic capability framework argues that competitive advantage is obtained through Schumpeterian rents (Teece et al., 1997). Schumpeterian rents can be thought of as the rents generated from the time a new innovation has been deployed, to the time this innovation has been imitated by competing firms. Dynamic capabilities have many definitions, but can be understood as the firm’s ability to transform its resources and ordinary capabilities into competitive advantages. These transformations are processes integrated in the firm, which will try to match the company to changes in the market and the business environment (Teece et al., 1997).
Fundamental strategy theory suggests that the more dynamic a market is the less long-term plans are necessary. In order to operate without extensive long-term plans and compete in such markets, the firm must develop a set of dynamic capabilities (Eisenhardt & Martin, 2000; Teece, 2007; Teece et al., 1997). In this thesis, I will investigate what type of dynamic capabilities are important in dynamic markets and what characterizes them. This could help firms understand and identify which capabilities they possess, which capabilities they must exploit, and which capabilities they need to obtain in order to gain a competitive advantage.
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1.1. Research question
Companies are currently facing an increasingly global competitive environment resulting in more market dynamism. Multiple theoretical frameworks have been developed but it is
unclear which specific factors are the most appropriate in describing competitive advantage in increasingly dynamic markets. In order for companies to understand how to achieve and sustain this competitive advantage, or to simply survive, the responsible factors needs to be identified and highlighted further. Based on the introduction of this topic and the discussion, I present the following research question.
“What are the sources of competitive advantage in a business environment characterized by high dynamism, and how is the competitive advantage sustained in such markets?”
1.2. Structure
This master thesis is structured in the following manner. After this introduction of the topic, I will continue with a description of my literature search process. Then a theoretical chapter follows in chapter 2 where I present the most relevant theory for explaining competitive advantage in dynamic markets. The theories identified will work as a basis for my research.
The theoretical chapter will conclude with a discussion and a presentation of a conceptual model. In chapter 3, I will explain the methodological choices made in this research. The chapter starts with an exploration of my philosophical standpoint before I move on to
explaining the chosen research approach and research design. After that, I will continue with the sampling and data collection processes before I end with an examination of the study’s validity and reliability. Chapter 4 will contain an analysis of the collected data and a discussion will follow in chapter 5. Chapter 6 will contain a conclusion, implications and suggestion for further research.
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1.3. Literature search
The selection of this topic was made after a very interesting strategy course in the fall of 2015. In this course, I read the articles of Drnevich and Kriauciunas (2011) & Spanos and Lioukas (2001) and they worked as a starting point for my literature search. There is a high degree of coherence amongst the strategy scholars, and the trail of references lead me to the main articles of both the resource-based view and the dynamic capabilities theory. The articles were found by searching in Google Scholar, Oria and ScienceDirect.
When supplementary literature and empirical articles were needed, I searched the databases ScienceDirect and JSTOR (Journal storage). The following key words were used: Market dynamism, dynamic capabilities, and competitive advantage. The filter was set to only include articles with one or multiple of these keywords either in the title or as keywords in the articles itself. Articles were phased out based on their title and abstract.
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2.0. Theoretical framework
In this chapter, I will outline the most significant and accepted theoretical frameworks developed to analyse the roots of sustained competitive advantage. I will begin by presenting definitions for the key terms used in the competitive advantage theory. Some authors use different terms to describe the same thing. It is therefore important to have clear definitions in order to see the links between the different works from different authors. Some terms are also similar but does actually refer to different things. Later, I will give a brief description of two other significant frameworks: (1) competitive forces approach and (2) The relational view. I will then continue with a more extensive description of the two most appropriate frameworks to apply in dynamic markets: (3) The resource-based view and the (4) Dynamic capabilities theory. The theoretical review will conclude with an empirical review of the dynamic capability framework.
2.1. Definitions
Resources
Wernerfelt (1984, p. 172) is considered one of the main contributors of the resource-based view and defines resources as ‘anything which could be thought of as a strength and weakness of a given firm. More formally, (…) those (tangible and intangible) assets which are tied semipermanently to the firm.’
Barney (1991, p. 101) uses a broader definition in his work of the resource-based view, and defines resources as ‘All assets, capabilities, organizational processes, firm attributes, information knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness’
Teece et al. (1997) uses an even broader definition of the term ‘resources’ than Barney (1991) and Wernerfelt (1984). Even though they do not like the term “resources” they define it as
‘firm-specific assets that are difficult or hard to imitate’(Teece et al., 1997, p. 516) in order to maintain a link between the dynamic capabilities theory and resource-based view. It is
interesting to see that in the definitions I have presented, all considers resources to be firm- specific assets. However, Teece et al. (1997) only considers these assets as resources if they are difficult to imitate by others.
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Competencies/Resource configurations/Ordinary capabilities
Competencies appears to be used quite vaguely amongst authors, and not often given a specific definition. In the dynamic capabilities theory, competencies can be defined as ‘when firm-specific assets (resources) are assembled in integrated clusters spanning individuals and groups so that they enable distinctive activities to be performed, these activities constitute organizational routines and processes’ (Teece et al., 1997, p. 516). Note that Eisenhardt and Martin (2000) uses the term ‘resource configuration’. Even though they do not define this term explicitly, it’s used in the same matter as ‘competencies’ are used among other authors.
Drnevich and Kriauciunas (2011) presents the term ‘ordinary capabilities’ in their empirical article, which can be associated with other authors’ use of ‘competencies’. They define
‘ordinary capabilities’ simply as ‘those capabilities through which a firm “makes its living”
in the short term’ (Drnevich & Kriauciunas, 2011, p. 255).
Spanos and Lioukas (2001, p. 909) defines capabilities as: ‘[the firm’s] ability to exploit and combine resources, through organizational routines in order to accomplish its targets’.
Dynamic Capabilities
Teece et al. (1997, p. 516) has the most prevalent definition of the term ‘dynamic capabilities’
and defines it as ‘the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments’.
Eisenhardt and Martin (2000, p. 1107) builds on the definition of Teece et al. (1997), and defines dynamic capabilities as: ‘(…) Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die’.
Helfat et al. (2009, p. 121) defines, in their extensive work on the dynamic capabilities theory,
‘dynamic capabilities’ as ‘the capacity of an organization to purposefully create, extend, or modify its resource base, and consists of patterned and somewhat practiced activity’.
Drnevich and Kriauciunas (2011, p. 255) draws on their definition of ‘ordinary capabilities’
(competencies) and defines ‘dynamic capabilities’ as ‘those capabilities used to extend, modify, change, and/or create ordinary capabilities’.
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As shown by the definitions, there is a general consensus and acceptance amongst authors of the term ‘dynamic capabilities’.
Competitive advantage and sustained competitive advantage
Barney (1991, p. 102) considers the firm to have a competitive advantage ‘when it is
implementing a value creating strategy not simultaneously being implemented by any current or potential competitors’. The firm has a sustained competitive advantage when ‘other firms are unable to duplicate the benefits of this strategy’ (Barney, 1991, p. 102). Whereas many researchers view the definition of these terms as implicit, Barney (1991) is one of the few researchers who offers a specific definition. However, this does not mean this definition is particularly good since it is quite tautological (Priem & Butler, 2001; C. L. Wang & Ahmed, 2007). The implementation of a value adding strategy does not necessarily grant the firm any type of advantage towards their competitors. It is not given that this strategy is better than the other strategies deployed, just because it is not available to other firms. A better definition would be: ‘the firm has a competitive advantage when it’s generating more rents than their competitors’ (Hill, Jones, & Schilling, 2014). Sustained competitive advantage does not however, imply that the advantage will last a specific calendar time or ‘for ever’. The competitive advantage will be sustained if there are not possible for competitors to compete the advantage away through duplication, thus the firm will have an advantage for an extended period. Strategic resources cannot be evenly distributed between the firms in an industry, or strategic group, nor can it be highly mobile, for firms to obtain a competitive advantage.
Dynamic markets
Baker and Sinkula (2005, p. 465) takes guidance in the work of Wernerfelt (1984) and define market dynamism as a composition of ‘(1) change in production/service technology, (2) competitive intensity, and (3) the general rate of change in an industry’.
G. P. Wang, Dou, Zhu, and Zhou (2015, p. 1930) has a similar view of dynamic markets and defines it as ‘frequent and unpredictable changes in product preferences and customer needs, in product and production technologies, and in the competitive landscape’
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2.2. Competitive forces approach
The most dominant strategic framework in the 80s was the competitive forces approach developed by Michael E. Porter (1980), therefore also known as Porter’s five forces. This framework builds on the structure-conduct-model and draws on the intellectual roots from Mason (1939) and Bain (1959). The competitive forces approach views the industry environment as the dominant factor to achieve sustainable competitive advantage. Firm performance is determined by how companies position themselves in regards to industry forces (Barney, 2011). The five forces identified by Porter (1980) are: (1) Threat of new entries, (2) Threat of substitution, (3) Power of supplier, (4) Power of buyer and (5) Degree of competitive rivalry.
2.3. The relational view
The relational view was first theorized by Dyer and Singh (1998) and they argued that the most prominent theories in explaining competitive advantage; competitive forces approach and resource-based view, had overlooked the importance of interorganizational linkages and relations. The theory has some similarities with the resource-based view but differs slightly.
The resource-based view focuses on resources possessed by and existing within each firm, but the relational view emphasises the resources that exists between firms. Dyer and Singh (1998, p. 662) argue that firms can earn relational rents and defines this as: ‘a supernormal profit jointly generated in an exchange relationship that cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners.’ Relational rents are possible when the alliance partners (1) invest in relation-specific assets, (2) have effective knowledge-sharing routines, (3) have
complementary resources and capabilities and (4) have effective governance structures.
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2.4. The resource-based view
It is widely accepted among authors that the resource-based view draws its intellectual roots from the seminal work of Penrose (1959) e.g. (Barney, 1991; Teece et al., 1997; Wernerfelt, 1984). Penrose (1959) analysed the firm rather than the industry to explain performance differences and viewed the firm as a set of resources. However, the idea to view the firm as a set of resources has received little formal attention, since the 1950s (Wernerfelt, 1984).
2.4.1. Resource scarcity
The competitive forces approach assumes that the firms within the same industry or strategic group control identical sets of resources. If they are not, however, these resources are highly mobile and can easily be bought and sold in the factor market. If these assumptions were true, the internal resources of a firm would not be the source for sustained competitive advantage (Barney, 1991). The resource-based view on the other hand assumes that there are some degree of scarcity in the available resources in the industry. Firms need to identify the attractive resources and obtain them before their competitors. This resource should in fact generate a resource position barrier, that is, a barrier for other competing firms to obtain similar resource and thus preserve the scarcity. Firms must identify the attractive resources and pick their fights in order to ‘win’ over their competitors (Wernerfelt, 1984). Dynamic business environments imply shifts in technologies resulting in a situation where new resources can be obtained frequently. However, the changes in customer’s preferences and industry players makes it difficult to identify these resources and “pick the correct fight”.
The resource heterogeneity and scarcity in an industry allows firms to benefit from Ricardian rents. In other words, the supply of the resources cannot be expanded rapidly to satisfy the demand for such resources. Thus, inferior resources are deployed by firms in order to keep up with the competition (Peteraf, 1993). The resource-based view has therefore two
assumptions: (1) Firms within an industry are heterogeneous in regards to the resources they control. (2) The resources a firm can control are imperfectly mobile across firms, thus gives the resource heterogeneously the potential to be long lasting.
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2.4.2. First mover advantage
Based on the assumptions above, firms can gain a first mover advantage from obtaining certain resources. Such resources can be: machine capacity, customer loyalty, production experience and technological leads (Wernerfelt, 1984). Firms can also benefit from unique distribution channels, a good reputation and relationship with customers and suppliers. Such resources are difficult for other firms to imitate and gives the focal firm the potential for sustained competitive advantage. In a dynamic market place with rapid changes in the overall competitive landscape, sensing the opportunity for being ‘a first mover’ reflects a unique resource by itself in the sense of obtaining and analysing industry information (Barney, 1991).
Teece (2007) would later consider this attribute as a ‘core capability’ of the dynamic capabilities.
2.4.3. VRIN-attributes
Barney (1991) developed the VRIN-framework where he tried to explain the link between firm resources and sustained competitive advantage. The framework suggests that the resources must have four attributes (hereby called the VRIN-attributes) in order to have the potential for obtaining sustained competitive advantage. The resources must be (1) valuable, (2) rare, (3) non-imitable and (4) non-substitutable.
The firm’s resource is considered valuable if it exploits opportunities or neutralizes threats in the business environment. The firm’s attribute needs to be valuable to be considered a
resource. Thereby, the attribute can have other characteristics such as (2) rare, (3) non- imitable and (4) non-substitutable, but is not considered a resource if it is not
exploiting/neutralizing the opportunities/threats in the business environment.
Besides being valuable, the resource needs to be rare in order to be the source of sustained competitive advantage. If the resource is possessed by multiple competing firms, then each of these firms will have the opportunity the exploit the same resources as the focal company.
Thus, if the resources controlled by the firm is only valuable and not rare, the firm will experience competitive parity. However, managers must not neglect the importance of resources that are not rare. They can ensure the firm’s survival by exploiting opportunities to achieve competitive parity.
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As discussed, a valuable and rare resource has the potential to give the firm a competitive advantage. Firms that control such resources are often strategic innovators and can be described as first movers. If there is no scarcity of the resources obtained by being a first mover, competing firms will eventually obtain these resources themselves. For the firm to establish a sustained competitive advantage, the resource must therefore be non-imitable.
Barney (1991) presents three reasons for why a resource is non-imitable: (a) a firm has
obtained the resource through unique historical events (this argument draws similarities to the path-dependencies argument of Teece et al. (1997) in the dynamic capabilities theory,
reviewed later), (b) there is a causal ambiguity in the link between the set of resources a firm possesses and the competitive advantage, (c) the resource that creates a competitive advantage is socially complex.
A firm’s location can be a non-imitable resource that was not anticipated at the time of acquisition and is then a result of a historical condition. The human capital resource, for example organizational culture, is also a resource that has been established as a result of the previous choices made by the firm. The organizational culture of a firm is imperfectly imitable and can therefore potentially create sustained competitive advantage, given that it enhances the firm’s ability to exploit opportunities or neutralize threats in the environment.
Competing firms will have difficulties imitating a firms sustained competitive advantage if it is not clear which resources cause this sustained competitive advantage. Causal ambiguity causes the imitating firm only to speculate in which resources of the focal firm’s resource pool that is the source for their success. The imitating firm might be able to identify the successful firm’s resource, but not to link them to the sustained competitive advantage.
Barney (1991) argues that even though it seems unlikely that managers will not understand the source of their sustained competitive advantage, the relationship between resources and competitive advantage is so highly complex that such a situation is plausible.
Social complexity is the last reason Barney (1991) presents as a reason for non-imitability.
The ability for firms to manage and influence a resource can be limited to their social
complexity, and thus constrains competing firms to imitate this resource. Such resources can be firm’s reputation, supplier and customer relationships, interpersonal relationships between managers etc.
The last requirement Barney (1991) presents as a necessity for a firm resource to be the source of sustained competitive advantage is that the resource must be non-substitutable. In
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other words, the resource must not have a strategically equivalent resource that competing firms can exploit. Substitutable resources can be defined as ‘two valuable firm resources (or two bundles of firm resources) are strategically equivalent when they each can be exploited separately to achieve and implement the same strategies’ (Barney, 1991, p. 111). Competing firms might want to duplicate the competitive advantage of another firm by imitating their clear vision of the future. This resource might exist due the firm’s charismatic and personality traits of the managers. Such traits can be difficult to imitate, but might be substituted by a formal planning system, and thus be strategically equivalent. The competitive advantage obtained from such a resource will therefore not be sustained despite being non-imitable, since other firms are able to substitute the resource.
The resource-based view focuses on the resource base controlled by the firm and competitive advantage is obtained by exploiting their bundle of resources. Resources are only the source of sustainable competitive advantage if they are valuable, rare, non-imitable AND non- substitutable. The main argument of the resource-based view is that sustainable competitive advantage cannot be purchased, but needs to stem from the already controlled resources within the firm. It may appear that the resource-based view undervalue the importance of managers and managerial skills. In a dynamic business environment, the VRIN-attributes of a resource are highly fragile. Barney (1991) argues that managers are highly important to his model in the sense that they are needed to understand and describe the economic potential of the firm’s resource base. Their importance is emphasised in markets where the new
opportunities and threats appear with high frequency. The theoretical approach I will review next, the dynamic capabilities theory, dives deeper into these managerial skills and
emphasizes the key attributes of a firm when competing in a dynamic business environment.
2.5. The dynamic capabilities theory
The resource-based view of the firm is a theoretical framework for how firms can obtain and sustain competitive advantage (Barney, 1991; Eisenhardt & Martin, 2000; Penrose, 1959;
Wernerfelt, 1984), but has performed less well in explaining competitive advantage in dynamic markets (Eisenhardt & Martin, 2000; Teece et al., 1997). The dynamic capabilities theory is an extension of the resource-based view but focuses on a more dynamic business environment (Eisenhardt & Martin, 2000).
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2.5.1. New sources of competitive advantage
The dynamic capabilities theory was described as ‘an emerging and potentially integrative approach to understand newer sources of competitive advantage’ (Teece et al., 1997, p. 516) in a rapidly increasing competitive marketplace. The competitive advantage lies not in the resources itself, but in the (1) managerial and organizational processes, (2) shaped by its asset/resource position, and the (3) paths available to the firm. By (1) organizational and managerial processes, it refers to how things are done in the firm, also known as the company routines. The (2) resource position, or resource configuration, refers to the technological assets of the firm. (3) Paths refers to the strategic actions that are available to the firm. The firm might also be path dependant, the strategic alternatives available at this time stems from strategic choices made earlier (Teece et al., 1997). Confusingly enough, Eisenhardt and Martin (2000) argues that the functionality of a dynamic capability can be imitated by competing firms and therefore their value for competitive advantage lies in fact in the resource configurations/competences that they create, and not in the dynamic capabilities itself.
The (1) organizational processes have three roles: integration/coordination, learning and reconfiguration. Firstly, firms need to coordinate their internal and external processes/routines in order to obtain a strategic advantage. Of the organizational processes, Teece et al. (1997) emphasize the importance of gathering and processing information, coordinating logistical activities and linking engineering design to customer experiences. Alliancing and
technological collaboration will give the focal firm access to new set of resources. These processes often shows a high amount of reliance on each other, making them difficult to imitate and replicate for competing firms. This replication demands a systematic
organizational change and it is difficult to identify the interorganizational linkages.
Teece et al. (1997, p. 520) refers to learning as ‘a process by which repetition and
experimentation enable tasks to be performed better and quicker’. Learning does not only relate to the organizational skills, but also the individual skills. The value of the individual skills are on the other hand dependant on their deployment in an organizational setting. New organizational knowledge obtained by learning must be integrated and renew the current processes and routines. Learning can also happen at an interorganizational level, building on
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the external organizational process alliancing. Collaboration and partnerships can help firms improve their current processes and identify dysfunctional processes.
The firm’s ability to sense the need to reconfigure and transform their current internal and external processes, are one of the most important abilities in dynamic business environments.
Firms need to gain knowledge about and adopt best practise by surveillance of the markets and the technologies. Teece et al. (1997) argues that firms should try to become so called
‘high-flex’ firms. High flex firms have decentralized decision-making that facilitate fast reconfiguration and transformation of the resources/competences in order to comply with the frequent changes in the market.
The firm’s strategic situation is not only a result of the organizational processes and routines, but also of the (2) firm specific resources. Technological resources refers to the ‘know-how’
of organizational routines and processes. The endowment of such resources are, according to Teece et al. (1997), the key to short term differences among firms. Technological innovation is often in need of complementary resources. Such resources normally lies downstream in the supply chain and can enhance or destroy the value of other assets. The firm’s financial
resources reflect the firm’s cash position and thus, determine their degree of leverage towards other players in the industry and can limit the firm’s strategic alternatives. Reputational resources shape the responses from competitors, customers and suppliers. The value of a company’s reputation has been recognised by several authors and has also been associated with first mover advantages (Barney, 1991; Wernerfelt, 1984). Structural resources refer to the intra- and interorganizational linkages, both formal and informal, and reflects how the company’s competences co-evolve.
(3) Paths dependencies is the last dimension Teece et al. (1997) considers to be the source of competitive advantage. The strategic alternatives available to the firm is a function of the firm’s current position and are shaped by the strategic choices made in the past. The effect of path dependencies is amplified in markets where there are ‘increased returns to adoption’.
That is, the more a product is adopted, the higher is the chance that new customer will adopt the product (Teece et al., 1997). However, the company with the best product does not necessarily ‘win’ in the market. Strategic actions in the past may have caused a ‘lock-in’
effect and switching cost for the consumer. Firms need to constantly sense opportunities and threats in the market since the strategic actions made today will shape the strategic
alternatives tomorrow. High switching costs benefits firms in dynamic markets with rapid technological change. Competing firms must therefore not only create a superior product than
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the focal firm, but the switching benefits must exceed the switching costs (Porter, 1980; Teece et al., 1997).
The profits accumulated by the firm’s resources are short term (Eisenhardt & Martin, 2000) and thus, the competitive advantage is not sustained. Their ability to transform and
reconfigure their assets base is the key to sustaining the competitive advantage (Teece, 2007;
Teece et al., 1997). A shift in environment are much more serious to the firm, than the loss of key individuals. New individuals can be bought in the factor market, but dynamic capabilities must be built within the organization (Teece et al., 1997).
2.5.2. The influence of market dynamism on competitive advantage
As mentioned in the definition section of this thesis, dynamic markets can be characterized by unpredictable and frequent changes in the industry structure and in the industry rules of play.
In a dynamic business environment, the success of the dynamic capabilities relies on the creation of new knowledge and not on the existing knowledge base. The existing knowledge base can even be a disadvantage if managers overvalue its importance and make them blind to new solutions. To rapidly create and obtain situation specific knowledge is a key capability in order to compete in dynamic markets. The manager’s skills to cope with uncertainty is a factor that that has the potential to slow down or speed up strategic decision-making in such markets (Eisenhardt & Martin, 2000).
Market dynamism has several implications on the dynamic capabilities. The sustainability of the capabilities themselves depends on the market dynamism. According to Eisenhardt and Martin (2000, p. 1113), capabilities in dynamic markets are ‘simple (not complicated), experiential (not analytical), and iterative (not linear) processes’. They rely on fast-paced sensing, learning and integrations of new knowledge based on the rapid shifts in the business environment. By considering the VRIN-attributes of a resource (Barney, 1991),
environmental changes can cause resources to become obsolete or they can be substituted and imitated by other firms. New emerging technologies can cause old processes to be slow or inefficient, or changes in customer preferences can cause the current product offerings to lose their value. The competitive advantage achieved by the firm are prone to other threats in dynamic markets. In static and moderately dynamic markets, external forces destroy the competitive advantage. In dynamic markets, the threats can also stem from inside the firm
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through the potential collapse of the dynamic capabilities. The reason being that the complexity of these capabilities creates a causal ambiguity (Eisenhardt & Martin, 2000).
Eisenhardt and Martin (2000) argues that the source of sustaining a competitive advantage in markets with high dynamism lies in using the capabilities sooner and more fortuitously than what the competitors do. The firm will create advantageous resource configurations before the competitors, thereby benefit from first mover advantages that will be sustained if they are hard to imitate. These resource configurations are particularly valuable if they are synergistic activities built with alliancing companies. The sustained competitive advantage lies therefore in the resource configurations built by dynamic capabilities, and not in the capabilities themselves. By that logic, dynamic capabilities are not sufficient but a necessity to obtain competitive advantage. In dynamic markets, the value of certain resource configurations cannot be expected to endure long-term. Shifts in new technology, market players, customer preference etc. will make certain resource configurations obsolete. The key is therefore not to obtain a sustained competitive advantage based on the same resources, but to use their
dynamic capabilities to continuously create new resource configurations that will result in a series of temporary advantages. The goal is to use the dynamic capabilities to move into new competitive positions. In order to continuously move into new competitive positions in dynamic markets, firms must scan the competitive landscape to sense, seize and manage opportunities and threats.
2.5.3. Sensing, seizing and managing opportunities and threats in a dynamic market
A decade after the first conceptualisation of the dynamic capabilities framework, Teece (2007) publishes an article explaining the so called microfoundations of the firm’s dynamic capabilities. Teece (2007) categorizes the firm’s dynamic capabilities into the core
capabilities: (1) The firm’s ability to sense opportunity and threats, (2) the firm’s ability to seize opportunities, and (3) the firm’s ability to manage threats/transforming. Teece (2007) refers to these capabilities as ‘orchestration skills’ or ‘asset orchestration processes’. I will now review the most important microfoundations of each of the core dynamic capabilities.
(1) Sensing and shaping new opportunities consists of scanning, creation, learning and interpreting activities. Firms must invest in research and search, scan and explore different technologies in the market. This includes understanding latent demand and open up
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technological opportunities by tapping into the research of others such as alliance partners.
Teece (2007) argues that the microfoundations of the sensing capability lies in the firm’s R&D processes to sense internal opportunities, but also in sensing external innovation opportunities from the suppliers. The firm must also tap into the developments in the scientific community to obtain advantages from new technologies. In order to conduct a successful innovation, the firm must understand the customers’ need. Once the firm senses a new opportunity, it must be taken advantage from in the form of new products, services or processes.
Teece (2007) discusses different microfoundations for (2) seizing the sensed opportunities.
Firstly, companies should delineate and synchronize their customer’s need and business model. Important choices regarding the business model includes the integration of new technology, financial terms such as leasing or buying, bundle or unbundled sales strategies.
Secondly, companies need to define the company boundaries. This includes the integration of upstream and downstream activities. The desire to vertically integrate activities are driven by the need to obtain scarce capabilities that are unevenly distributed in the industry. Thirdly, managers must avoid bias and delusion when conducting strategic decisions. Decision errors made in highly dynamic markets are amplified since there is less opportunities to recover.
Overcoming decision-making bias is not a common skill amongst managers, and can be used to obtain competitive advantage in particularly dynamic markets. This demonstrates
leadership and emphasizes the last microfoundation: building loyalty and commitment.
Building loyalty and commitment among the employees will increase the chance of implementing successful changes in the firm.
The capability to sense and seize opportunities can lead to competitive advantage, but the firm’s ability to (3) manage threats and transform the resource configuration is the key to sustaining that advantage. Teece (2007) argues that the firm should become more
decentralized in order to increase responsiveness and flexibility to environmental threats.
However, this may compromise the firm’s ability to properly integrate firm activities. Firms must also manage and specialize their resources. A new resource can be built by combining two separate resources, which again can be difficult to imitate for competitors. Managers’
ability to identify, develop and utilize the combination of two resources, is an important dynamic capability.
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2.5.4. Empirical review of the Dynamic Capabilities theory
In this chapter, I will review some of the empirical articles focusing on the Dynamic
Capabilities framework. In this master thesis study, I have focused on how firms obtain and sustain competitive advantage in dynamic business environments. Therefore, I have only selected articles that considers environmental dynamism in their analysis. The items used in these studies will also aid me in my own data collection process. Since the logic of the
resource-based view of the firm is corrupted in dynamic markets (Eisenhardt & Martin, 2000), I will only select empirical articles that considers the dynamic capabilities of a firm and the resources. The main hypothesises and findings of each study will be presented.
The moderating effect of market dynamism on the capability performance
Drnevich and Kriauciunas (2011, p. 255) examined ‘under what conditions do ordinary and dynamic capabilities contribute to firm performance’ in their research article. They developed three sets of hypothesises: (1) how ordinary and dynamic capabilities directly affects firm performance, (2) how environmental dynamism moderate the capabilities effect on firm performance, and (3) whether capability heterogeneity is necessary for the capabilities to contribute to firm performance. Drnevich and Kriauciunas (2011) measures performance on both the process level and the firm level. The process level focuses on the capability output of productivity, business process performance and quality of their offerings. The firm level performance was measured by their profits as a percentage of sales.
In their first set of hypotheses, Drnevich and Kriauciunas (2011) hypothesised that the deployment of ordinary and dynamic capabilities have a positive effect on firm performance.
They found support for the effect of ordinary capabilities on both levels, but only found support for the effect of dynamic capabilities on the process level. This emphasises the importance of the ordinary capabilities and strengthen the argument of Eisenhardt and Martin (2000) that the source of competitive advantage lies in the resource configuration.
The second sets of hypotheses explores the moderating effect of market dynamism. They hypothesised that market dynamism would have a negative moderating effect on ordinary capabilities, and a positive moderating effect on dynamic capabilities. There was no support in this moderating effect on the on the process-level, but they found support for both
hypotheses at the firm level (profitability). These findings support the work of several authors
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that the dynamic capabilities are crucial in dynamic markets (Eisenhardt & Martin, 2000;
Helfat et al., 2009; Teece, 2007; Teece et al., 1997).
Drnevich and Kriauciunas (2011) theorized in their third set of hypotheses that the
heterogeneity of capabilities would have a negative moderating effect on the performance of ordinary capabilities, and a positive moderating effect on the performance of dynamic capabilities. They found support for the effect on ordinary capabilities, but in the opposite direction of what they hypothesised. This indicates that the “best practice” of doing things are not widely diffused in the industry. Some firms can then draw benefits from protecting their ordinary capabilities. This supports the argument in the resource-based view that resources are in fact heterogeneous amongst firms and can be the source of competitive advantage (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984). They observed support for the moderating effect on dynamic capability performance, which suggests that the dynamic capabilities are complex in nature and firm specific.
Innovation, information and relational capability
G. P. Wang et al. (2015) examines how the three dynamic capabilities innovation,
information, and relational capability enables external collaboration in dynamic markets and how this affects firm performance. The innovation capabilities refers to the firm’s ability to innovate new products and processes. The information capability refers to the firm’s ability to manage information. This includes obtaining, analysing, coordinate and communicate market information. This ability draws similarities to the Sensing capability of Teece (2007).
Relational capability refers to the firm’s ability to manage external relationships and alliances.
Distinguishing their current business relationships between transactional and collaborative relationships are key abilities, and enables the firm to treat the different relationships accordingly. It also includes the process of obtaining, developing and identifying the best relationships. The moderating effect of market dynamism is theorized to increase the effect of the three capabilities on external collaboration.
G. P. Wang et al. (2015) finds support for the three main effects of the capabilities on external collaboration. They also find support for the positive effect external collaboration has on overall firm performance. The results from their study shows that market dynamism has a strong moderating effect on the relationship between the innovation capability and external collaboration effectiveness, and thus increase firm performance. This suggests that
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collaboration success in dynamic markets depends on the firm ability to innovate. A similar moderating effect is observed with the information capability. However, the study shows that the information capability have moderately to no effect in stable market, but a high effect in dynamic markets. The importance of information management found here strengthens the arguments of Teece (2007) that obtaining information in dynamic markets are crucial.
However, it’s surprising that no effect of information management on external collaboration effectiveness was found. G. P. Wang et al. (2015) failed to observe a moderating effect on the relationship between the relational capability and external collaboration effectiveness. This, does not however, suggest that there is no effect at all, or that the relation capability is not important, but that it was not particular important in dynamic markets. This finding
contradicts the arguments of the dynamic capabilities theory that the ability of alliancing and managing relationship is one of the key abilities to obtain a competitive advantage in dynamic business environments (Eisenhardt & Martin, 2000; Teece et al., 1997).
The capabilities effect on financial performance and competitive advantage
Fang and Zou (2009) argues that many firms engage in international joint ventures or alliances in order to obtain dynamic capabilities that are otherwise unavailable. They also argue that the effects of dynamic capabilities lack an empirical foundation. Fang and Zou (2009) aimed to fill this gap by researching how dynamic capabilities affect the firm’s financial performance and competitive advantage, with the focus on marketing dynamic capabilities in international joint ventures. In their study, Fang and Zou (2009, p. 744) define marketing dynamic capabilities as ‘the responsiveness and efficiency of cross- functional business processes for creating and delivering customer value in response to market change’.
They measured the dependant variable competitive advantage in how well managers agreed to that their firm have strategic advantages over their competitors. Financial performance was measured by the firm’s Return on Assets (profits/ total assets) and sales/total assets. In accordance with the fundamental argument of the theory that the dynamic capability is the ability to respond to external markets changes (Eisenhardt & Martin, 2000; Helfat et al., 2009;
Teece, 2007; Teece et al., 1997), the authors also tested the moderating effect of market dynamism.
Fang and Zou (2009) found support for their hypotheses that the deployment of marketing dynamic capabilities positively influences the firm’s financial performance and competitive
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advantage. Market dynamism positively moderated the link between marketing dynamic capability and financial performance. However, market dynamism only marginally moderated the link between market dynamic capabilities and competitive advantage (p < 0.10). The results from this research supports the fundamental argument of the dynamic capabilities theory discussed earlier. The use of dynamic capabilities (in this case, marketing dynamic capabilities) will give the firm positive effects on firm performance. These effects will be amplified in markets characterized with a high degree of dynamism. According to this study, leveraging the dynamic capabilities can generate a competitive advantage in dynamic business environments.
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3.0. Discussion and conceptual model
In the theoretical review I have presented the most relevant literature, both theoretical and empirical, in the field of competitive advantage in dynamic markets. The resource-based view offers a good explanation of the source of competitive advantage and how this advantage is sustained. Even though this framework works best in static and less dynamic markets, it creates a good foundation for the dynamic capabilities theory. The most important similarities between these two theories is that they both acknowledge the importance of resources. As mentioned before, the dynamic capabilities theory suggests that the source of competitive advantage lies not in the capabilities, but in the resources which the capabilities shape, modify or creates. However, in dynamic markets, it cannot be expected that the current resource configuration will generate a long-term advantage. The competitive forces, changes in customer preference and technological advancement will, with time, corrupt the VRIN- attributes of the resource. New or current competitors will find ways to imitate or substitute the functionality of the focal firm’s resources due to the dynamic business environment.
Changes in customer preference or the introduction of new technologies has the potential to make resources less valuable, and thus not give the focal firm any benefits.
Therefor it is not likely that the VRIN-attributes of a resource will be sustained in a dynamic market. The dynamic capabilities theory therefore argues that the firm must always reposition themselves to fit the market. A sustained competitive advantage is obtained through a series of temporary advantages. This demands a high degree of flexibility from the firm and the ability to adapt rapidly to shifts in the industry landscape. The firms must use their dynamic capabilities to continuously create or modify their resources to secure that they always feature the VRIN-attributes. In order to do this, firms must incessantly scan the market to sense the opportunities that appear as a result of the market dynamism. If the firm has a good sensing capability the opportunities that arise can be captured first by the focal firm and thus it can benefit from first mover advantages. For example, new technology can be patented or a good relationship can be established with new customers or suppliers. The firm should then quickly change their resource configuration in order to seize the opportunity. Competing firms have the possibility to engage in aggressive actions in order to also draw benefits from these or other opportunities. Firms must therefore not only scan for opportunities, but also for threats and then engage in defensive actions. This results in a never-ending cycle of scanning for changes in the business environment, and continuously strive to change their resource configuration to fit the ever changing “rules of play” in the industry.
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Based on the reviewed theories of competitive advantage and the discussion above, I have developed a conceptual model (Figure 1) that tries to answer the research question proposed in the introduction section of this master thesis.
Figure 1: Conceptual model
Figure 1 shows the competitive advantage cycle in dynamic markets. Note that this cycle describes how competitive advantage is obtained, and the competitive advantage is sustained by repeating this process. Market dynamism opens up new opportunities for the firm which needs to be sensed and identified. Then the firm must use their dynamic capabilities to obtain new or modify their current resources to generate VRIN-attributes that fits the new
opportunities. With time, the market dynamism will present new threats for the firm which needs to be sensed and managed through defensive actions. The quality of managing these threats will influence the time before the VRIN-attributes are corrupted. When the VRIN- attributes eventually are corrupted due to market dynamism, firms must sense new evolving opportunities and then repeat the process. This model does not suggest that firms do these steps one by one, but rather continuously and simultaneously to create multiple sequential competitive advantages.
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4.0. Methodology
In this chapter, I will describe and explain the selected research method applied in this study. I will start by exploring and acknowledge my philosophical stance in this study. Then, I will account for my research selections regarding research approach, research design, method for data collection, selection of cases and informants. This chapter will conclude with an
assessment of the validity and reliability of this study.
4.1. Philosophical stance
Researchers tend to have different opinions when it comes to their views on realities,
knowledge and how knowledge is best obtained. These differences stem from the researcher’s different philosophical positions, and how to you apply their philosophy during the research process. The question of ‘how to research’ is often a philosophical one and it is therefore important for the researcher to address this question. Acknowledging your own philosophical views can help the researcher carry out their research. It’s also a method to obtain
transparency in their work since the choices made during the research process can be explained by their acknowledged philosophical standpoint (Savin-Baden & Major, 2013).
Ontology, a branch within philosophy called metaphysics, is an area that addresses the views on reality (Savin-Baden & Major, 2013). It tries to answer three closely related but separate questions: What exists, what properties does it have and what laws and forces is it controlled by (Davidsen, 2004). The two endpoints on the ontological continuum are realism, an
objective perspective, and idealism, a subjective perspective. Realism suggests that the reality is independent of the individual’s interpretation reality. The human experience and perception is separate from the physical universe (Mackay, 1997). Realists therefore acknowledge both a
‘social reality’ and a ‘physical reality’ (Savin-Baden & Major, 2013). Idealism on the other hand, suggests that the reality is subjective and constructed in the peoples’ minds.
The researchers view on knowledge and how knowledge may be known, is a part of the philosophical branch epistemology (Honderich, 1995). This branch is concerned with the origin, nature, limits, method and justification of knowledge (Hofer & Pintrich, 2004).
In order to locate themselves and their ontological and epistemological view, researchers often adopt a philosophical paradigm to guide their research. A paradigm can be defined as a
‘basic belief systems based on ontological, epistemological and methodological assumptions’
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(Guba & Lincoln, 1994, p. 107). It is simply a worldview or system of philosophical
standpoints that helps the researcher conduct their research, and to help the reader understand the choices made during the research process. According to Savin-Baden and Major (2013), the six most common paradigms that researchers adopt is critical social theory, pragmatism, phenomenology, post-modernism and post-structuralism, constructionism and constructivism.
All of these paradigms has different ontological and epistemological views and perspectives on how research should be conducted.
Of the six belief systems mentioned, I personally identify most with the phenomenology paradigm. This philosophical paradigm places itself in the centre of the ontological
continuum. Phenomenologists do not believe that reality simply exists and people may know about it (realism), nor do they believe that reality is simply constructed in the mind (idealism).
Phenomenologists believe that reality is a product of the mind. Reality is shaped through the interpretation of individual experiences (Schwandt, 2000). In other words, reality is what individuals experience and how they interpret the objective world. The epistemological view of the phenomenologists is that knowledge derives from the interpretation of the individual experiences. The methods of gaining knowledge should thereby include a close examination of the said experiences (Savin-Baden & Major, 2013). However, phenomenologists
acknowledge that the researcher and the informant can have different biases in regards to the individual’s history and traditions which shape how the individual understand the world (Gallagher, 1992). The researcher must therefore try to capture the individual’s experience of a situation or phenomenon, but simultaneously be aware of the informant’s potential biases.
I have now acknowledged my philosophical standpoint and this will contribute in explaining the choices made during the research process, and of course to obtain some transparency. The philosophical belief system I identify with is phenomenology, and I share their ontological and epistemological views. I believe that reality is cannot be said to exist strictly in two separate forms, the physical forms and in the human mind. Reality is a complex thing and the reality that resides in the human mind is influenced by the reality in the physical world. I also believe that knowledge can only be gained by interpreting their own experience, but maybe more importantly, the experiences of others. That is how for example students obtain knowledge. They are reading textbooks and articles, which again is a product of the
interpreted experience of others. However, it is important to be aware of potential biases that may exists. People can overvalue their own experiences and interpret them differently than
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the experiences of others. People can also interpret the same experience differently and this master thesis is no exception.
4.2. Research method
One of the first choices researchers have to make is whether to use a qualitative or quantitative research approach. Both have their perks and drawbacks, and is more fitting depending on the nature of the research and the research question. Using a quantitative research approach, such as a survey, is appropriate if the research question contains words such as ‘what’ and ‘who’. A qualitative approach is more appropriate if the research question contains words such as ‘how’ and ‘why’ (Meyer, 2001; Yin, 2009).
If we look at my research question: “What are the sources of competitive advantage in a business environment characterized by high dynamism, and how is the competitive advantage sustained in such markets?” We can see that my research question contains both the word
‘what’ and ‘how’, and therefore is appropriate in both a qualitative and quantitative research approach. Quantitative research methods are appropriate when there is an established theoretical foundation and the researcher wants to test the theories. Qualitative research methods on the other hand, is appropriate when the area of study is new and there is not much prior theory. The area of competitive advantage is highly theorized with the competitive forces approach (Porter, 1980), the resource-based view (Barney, 1991; Wernerfelt, 1984), the dynamic capabilities theory (Eisenhardt & Martin, 2000; Teece, 2007; Teece et al., 1997) and the relational view of competitive advantage (Dyer & Singh, 1998).
In my theoretical review, I established the fact that the dynamic capabilities approach would be the most appropriate framework to use in my research. Recall that dynamic capabilities can be defined as ‘the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments’ (Teece et al., 1997, p. 516). The question then arises on how to measure this in a quantitative matter while simultaneously controlling for potential biases. Practitioners may be overvaluing their own capabilities and competences, and that is difficult to control for in the research without a qualitative approach.
Competitive advantage in itself is a very complex phenomenon and the source of competitive advantage is not yet clear in the theory, hence the existence of numerous competing theories.
In order to control for all these different theories and biases, I believe that it is necessary to be
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flexible in the data collecting process. Choosing a qualitative research method will grant me this flexibility. I also want to investigate the core capabilities (Teece, 2007) of the dynamic capabilities which constitutes the manager’s ability to sense opportunities and threats in the market. In alignment with my phenomenological belief system, I value the manager’s
experience in regards to how they respond and even recognise such opportunities and threats.
I also suspect that some of the terms used in the theory might be misunderstood by
practitioners. ‘Resources’ for example is prone to be only understood as a financial resources or human resources, and practitioners might not consider it to also include brand liking, quality and so on. Such misunderstandings are difficult to identify in a quantitative research approach and have the potential to reduce the internal validity in for example a survey. Due to the arguments presented above, I have chosen a qualitative approach to my research project.
Yin (2013) describes the processes in a qualitative research project as shown in figure 2. I will in this chapter go through the steps plan, design, prepare, collect and analyse. The last step is share which is done with this written report of the master thesis. It is important to notice that the steps in a qualitative research project is not a linear but rather an iterative and repetitive process, indicated by the directions of the arrows.
Figure 2: Processes in qualitative research (Yin, 2013)
4.3. Research design
The most eminent qualitative research method is the case study method. The research design should always reflect the research question (Thagaard, 2003) and the case study method
